Last night INTC pre-announced higher than expected Q2 revenues with a slight bump to margins:
As a result of stronger than expected demand for business PCs, Intel Corporation now expects second-quarter revenue to be $13.7 billion, plus or minus $300 million, as compared to the previous range of $13.0 billion, plus or minus $500 million. The company is forecasting the mid-point of the gross margin range to increase by 1 point to 64 percent, plus or minus a couple of percentage points, driven mostly by higher PC unit volume.
While this is obviously good news, the stock’s 7% increase today on a such a slight bump is a bit surprising as the stock makes new 10 year highs:
Earlier today when the stock was trading $29.68 there was a large bullish roll in October calls where a trader sold 25,000 Oct 30 calls at 1.08 to close and bought 75,000 Oct 33 calls for .27 to open. This is a fairly bullish trade where the trader took in $2.7 million in premium from the calls that he sold and rolled the bullish view up, committing $2 million in premium for a trade that now breaks-even at $33.68 on October expiration, up 12% from current levels.
Today’s unexpected pop, likely the largest one day move in years, coupled with the flurry of call buying (calls trading 3.5x that of puts today, and total options volume 6x avg daily) has caused a considerable spike in implied vol, after last week making new 10 year lows:
In the company’s press release they referred to strong demand of business PCs for the upside, which might have been a result of Microsoft’s decision earlier in the year to END support for Windows XP, the most prevalent operating system on legacy business PCs. So maybe INTC sees a bit of an upgrade cycle in 2014 but this does not change the fact that consumer PCs continue to be challenge from both demand due to cannibalization from tablets and the growing size of Smartphone screens, and what will continue to be lower price points for desktops and notebooks.
While the PC end-market remains challenged, the company continues to position for an increasingly mobile computing world and by many accounts are gaining traction, specifically in tablets. But the company faces a very formidable competitor in smartphones with QCOM’s near monopoly.
Analysts expect INTC to finally stem 2 consecutive years of negative earnings and sales growth, but before anyone does a back-flip they are only expected to grow 5% and 1% for perpetuity. But you know the drill. A massive cash balance (8% of market cap net of debt 17% gross), dividend yield of 3%, monster multi-billion dollar share buyback and a near monopoly in their chips for PCs and servers. So trading at 14x next year’s expected earnings, the stock is cheap relative to the market and most Semiconductor peers.
The company is confirmed to report their full Q2 guidance on July 15th. With the stock at 10 year highs, up 15% on the year I think it is safe to say that expectations are high. If the company does not guide Q3 up, I would expect a pull back to $28. While vol has spiked a little, it is likely to continue to rise into the report, and there are some near the money options that look dollar cheap to me. I want to make a near term bearish bet that the stock settles back in towards $29 prior to the results.
TRADE: INTC ($29.89) Bought July 11th/ July 18th 29 Puts spread for .14
-Sold July 11th 29 put at .23
-Bought July 19th 29 put for .37
Break-Evens on July 11th Expiration:
-Profits are maximized at 29 on July 11th expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
-Max risk is .14
Rationale: Point here is to isolate the earnings event but look to finance the bearish earnings trade by selling a shorter dated put that could help offset decay in and around the July 4th holiday that could see some sideways low volume trading. This is obviously a contrarian trade and a I want to look to risk as little premium as possible. If the stock were to go to 29 over the next couple of weeks this trade would have a nice profit and then I have a high class problem, but if the stock consolidates in and around 30 then I own a $1 out of the money put for .14 into and event. I like the set up.